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| Sun Jul 20 22:06:30 2008 Fannie and Freddie |
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| Tue Jul 8 23:31:32 2008 Moon Shot |
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| Mon Jun 30 23:18:26 2008 Seizing up again |
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| Sun Jul 20 22:06:30 2008 Fannie and Freddie More seizing up! |
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| The latest US economic crisis is centered on
Fannie Mae and Freddie Mac, our hapless mortgage resellers. That article uses my favorite phrase,
noting that the entire mortgage industry could
seize up if the two companies aren't bailed out with taxpayer money.
As a relevant aside, read this great overview of Freddie and Fannie, written by a History News Network intern in 2003. One prescient quote:
What happened? Fannie and Freddie make a business out of lending money to people to buy homes, and then bundling and reselling most of the resulting mortgages. The idea is that investors will pay hard cash to the firms now, and then take the loan payments for themselves. Fannie and Freddie can then use that investment money to make more loans. That works great as long as very few people default. Investors will keep buying mortgage securities if they think they'll get most of the loan payments they are owned. With a low default rate, buying mortgage securities is like a bond: you invest a chunk of money, and then earn interest as mortgagees pay back their principal and interest. However, we are now seeing mortgage defaults on the order of 10% or higher--enough to wipe out any potential returns due to interest. Since interest rates for mortgages are low (less than 7%), mortgage securities are already lean returns. With a 10% default rate, they are guaranteed money-losers, and no one will touch them. That has spooked many people. Investors (shareholders in the two companies) think they could collapse, or at the very least, need to dilute shareholder value to raise cash. That has sent the stock price into a tailspin. Now international investors are worried because they hold large investment positions, all with the assumption that the US Government will bail them out if either institution fails. At the moment, the Federal Reserve is proposing that we spend untold billions to rescue the two companies. My take? Let them fend for themselves. There are two reasons for that. First of all, no one is sure how bad the situation really is. I admit: it could be as bad as some doomsayers predict. A collapse of Freddie and/or Fannie may trigger a large recession or worse. However, we don't know that for sure, and all a bailout will do right now is reward poor management of two critical companies. Secondly, this attitude that the US economy is very fragile and must be constantly propped up is dangerous and historically bogus. Dangerous because simple minds can be led to believe that minor financial sleight-of-hand can somehow fix massive structural problems. Historically bogus because the economy is a machine with many trillions of dollars flowing through it. Multiple governments tried to prevent the currency collapses of 1992 and 1997. In every case, the markets did what they wanted to do, and anyone that got in the way was run over--including the governments which lost billions in the process. The short answer? If you really have a system built on a house of cards, the earlier it collapses the better. Don't keep trying to prop it up. Comments |
Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science |
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| Tue Jul 8 23:31:32 2008 Moon Shot How not to run a space program. |
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| Today's announcement about
retiring the shuttle fleet reminded me of the poor US space strategy in general.
I'm a big fan of basic science research, and of space exploration. But the current proposal to put a man on the moon by 2020 is bad science, and bad economics. It reminds me of the Onion article titled "NASA Announces Plan to Launch $700 Million into Space". Of course, the Onion was thinking too small. The moonshot proposal will cost over $100 billion. And that's before the inevitable cost overruns. What are the benefits of sending men back to the moon? Not many, really. While it is easier to launch from the Moon than the Earth, it is even cheaper to launch from orbit. So a moon base isn't useful just as a launch pad to go further. The moon mission is generally opposed by scientists. The main objections are that it isn't a good way to train for Mars (landing on an asteroid would be far better), and the cost would mean basic science research would be drastically cut. What are the chief problems that we are facing in human space exploration?
What are the chief aims of further space exploration?
If you look, you'll see that we could meet most of the chief scientific aims without manned spaceflight! Manned spaceflight increases costs by 10x or more, and doesn't provide any better data. In fact, given current technologies, it isn't clear that manned spaceflight is worth pursuing at all! [Aside: it was hard to find good data on the costs of manned vs. unmanned space flights. But based on costs for recent shuttle launches and Mars probes, it appears that 10x is a safe estimate, and it could even be 20x or more. Think about that: if we cut a few shuttle flights out, we could launch dozens more robotic missions into the solar system!] Instead, NASA should focus on cheaper, robotic missions to meet scientific aims, and also work on parallel tracks on the chief obstacles to human missions: getting into space cheaply (propulsion out of Earth's gravity well), and surviving in a self-contained environment. I suspect some of the reasons for the moon plan are strategic and military. But having a range of flexible and reliable space technologies will probably be of more strategic use in the future than an expensive (and probably abandoned) moon plan. Comments |
Related: science > economics < Unrelated: books energy environment geopolitics lists mathematics predictions |
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| Mon Jun 30 23:18:26 2008 Seizing up again The Fed confirms what I already said... |
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| Friday there was a
Yahoo story about the
Federal Reserve's moves to shore up Bear Stearns.
If you read Seizing Up Explained then you already know the story: the Fed felt it had to move because the entire investment banking industry was on the verge of collapse. The article was based on recently-released documents "providing insights into its private deliberations." The documents pull no punches, saying they feared an "immediate failure" of Bear Stearns, and such an event would cause an "expected contagion." I thought the "documents" were minutes of the meeting. They weren't, at least not verbatim. The Yahoo story didn't reference them, but I found the minutes on the Federal Reserve website. I was hoping (naively) for transcripts of the discussions. Instead, these are just bullet summaries, written after the fact (the documents reference other events that happened on April 1, for instance). So the "minutes" had the benefit of being written with considerable hindsight. My take on these? They are intended to support the Federal Reserve's decision to bail out Bear Stearns, and don't provide much insight into the decision making at the time. I don't think the Federal Reserve's documents are propaganda, but they have to be questioned. On the one hand, you can see that Reserve members were worried about a general collapse. On the other hand, a cynic could wonder if they were going out of their way to help a few investment banks that didn't deserve to be saved, and they are still trying to defend that decision. It is very clear that the entire banking system was not primed to collapse. There were a number of investment banks who were vulnerable, but any banks in that position deserved to fail. If a general "contagion" really developed, the worst that could happen is that investment banks would have a run on their funds. Don't get me wrong, that's pretty bad, but it would remind those who invested money there that those banks are not guaranteed. Of course, it is possible that by allowing commercial and investment banks to merge, the US has created a situation where instabilities in (poorly regulated) investment banks can jeopardize our (taxpayer-guaranteed) commercial banks. If that is true, then the solution is to force commercial and investment banks to stay separate, not to guarantee investment banks. If we've leared anything from the subprime mortgage mess, it's that investment banks are fraught with risk. After all, that's the path to higher returns. The solution is to make sure investors understand the risks, rather than pretend we can control them. Comments |
Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science |
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